SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-26570
Harrodsburg First Financial Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 61-1284899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
104 South Chiles Street, Harrodsburg, Kentucky 40330-1620
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606) 734-5452
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes X No
As of August 1, 1996, 2,145,945 shares of the registrant's common stock were
issued and outstanding.
Page 1 of 17 Pages Exhibit Index at Page N/A
-----
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 (unaudited)
and September 30, 1995 3
Consolidated Statements of Income for the Three-Month
Periods Ended June 30, 1996 and 1995 (unaudited) and
the Nine-Month Periods Ended June 30, 1996 and 1995
(unaudited) 4
Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended June 30, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
2
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
------------------
As of As of
June 30, September 30,
ASSETS 1996 1995
------------ -------------
(unaudited)
Cash and due from banks $ 603,192 $ 551,447
Interest bearing deposits 18,529,053 21,438,983
Certificates of deposit 3,000,000 5,500,000
Available-for-sale securities 1,647,756 1,332,177
Held-to-maturity securities 8,986,825 1,747,343
Loans receivable, net 75,483,726 75,433,526
Accrued interest receivable 589,016 553,686
Premises and equipment, net 595,378 538,584
Other assets 142,309 138,527
----------- ------------
Total assets $109,577,255 $107,234,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 77,844,827 $ 75,893,177
Advance payments by borrowers for
taxes and insurance 51,863 86,929
Income taxes payable 818,616 634,083
Other liabilities 34,272 434,870
------------ -------------
Total liabilities 78,749,578 77,049,059
------------ -------------
Stockholders' equity:
Common stock, $0.10 par value, 5,000,000
shares authorized;
2,182,125 shares issued 218,213 218,213
Additional paid-in capital 20,983,037 20,948,904
Retained earnings, substantially restricted 10,600,889 9,934,378
Treasury stock, 23,100 shares, at cost (353,763) 0
Net unrealized appreciation on available-
for-sale securities 1,037,701 829,419
Unallocated employee stock ownership plan
(ESOP) shares (1,658,400) (1,745,700)
----------- -----------
Total stockholders' equity 30,827,677 30,185,214
----------- -----------
Total liabilities and stockholders' equity $109,577,255 $107,234,273
=========== ===========
See accompanying notes to consolidated financial statements.
3
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
------------------
For the Three-Month Periods For the Nine-Month Periods
Ended June 30 Ended June 30
1996 1995 1996 1995
--------- --------- --------- ---------
Interest income:
Interest on loans $1,479,275 $1,418,579 $4,441,402 $4,172,942
Interest and dividends
on securities 128,798 26,260 264,883 76,615
Other interest income 309,749 203,877 1,056,676 620,585
--------- --------- --------- ---------
Total interest income 1,917,822 1,648,716 5,762,961 4,870,142
--------- --------- --------- ---------
Interest expense:
Interest on deposits 973,010 971,870 2,936,401 2,739,463
--------- --------- --------- ---------
Net interest income 944,812 676,846 2,826,560 2,130,679
Provision for loan losses 0 22,584 0 76,982
--------- --------- --------- ---------
Net interest income after
provision for loan losses 944,812 654,262 2,826,560 2,053,697
--------- --------- --------- ---------
Non-interest income:
Loan and other service fees,
net 19,573 14,564 56,058 44,084
Real estate operations, net 0 (66) 0 (681)
Other 5,852 6,327 16,933 15,479
--------- --------- --------- ---------
Total non-interest income 25,425 20,825 72,991 58,882
--------- --------- --------- ---------
Non-interest expense:
Compensation and benefits 200,710 195,722 612,035 558,679
Occupancy expenses, net 30,357 30,624 90,527 99,024
Federal and other insurance
premiums 48,902 46,801 163,739 141,157
Data processing expenses 21,486 21,459 69,047 66,629
State franchise tax 24,143 20,608 68,894 63,086
Other operating expenses 67,030 45,923 259,511 152,747
--------- --------- --------- ---------
Total non-interest expense 392,628 361,137 1,263,753 1,081,322
--------- --------- --------- ---------
Income before income tax
expense 577,609 313,950 1,635,798 1,031,257
Income tax expense 200,591 106,743 567,775 350,628
--------- --------- --------- ---------
Net income $ 377,018 $ 207,207 $1,068,023 $ 680,629
========= ========= ========= =========
Earnings per share $ 0.19 N/A $ 0.53 N/A
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
------------------
For the Nine-Month Periods
Ended June 30,
1996 1995
--------- -------
Cash flows from operating activities:
Net income $1,068,023 $ 680,629
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 0 76,982
ESOP benefit expense 121,433 0
Provision for depreciation 43,740 52,609
Amortization of loan fees (46,594) (30,520)
FHLB stock dividend (59,400) (51,800)
Change in:
Interest receivable (35,330) 45,396
Interest payable (1,419) 1,417
Accrued liabilities (33,765) (9,312)
Prepaid expense (3,782) (34,388)
Income taxes payable 77,236 59,033
---------- ----------
Net cash provided by operating
activities 1,130,142 790,046
---------- ----------
Cash flows from investing activities:
Net (increase) decrease in loans (3,606) (1,913,236)
Proceeds from certificates of deposit 2,500,000 0
Purchase of held-to-maturity securities (7,208,849) 0
Principle repayments - mortgage back
securities 28,766 0
Purchase of fixed assets (100,534) (109,768)
---------- ----------
Net cash (used) by investing
activities (4,784,223) (2,017,110)
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in demand
deposits, NOW accounts and savings
accounts 924,648 (1,461,452)
Net increase (decrease) in certificates
of deposits 1,027,002 380,368
Net increase (decrease) in custodial
accounts (35,066) (11,061)
Payment of conversion expenses (365,414) 0
Purchase of common stock (353,763) 0
Dividends paid (401,511) 0
---------- ----------
Net cash provided (used) by
financing activities 795,896 (1,092,145)
---------- ----------
Increase (decrease) in cash and cash
equivalents (2,858,185) (2,319,209)
Cash and cash equivalents, beginning of
period 21,990,430 10,350,456
---------- ----------
Cash and cash equivalents, end of period $19,132,245 $8,031,247
========== =========
Supplemental Disclosures of cash flow
information:
Cash paid for interest on deposits $ 2,937,819 $ 2,738,046
========== =========
Cash paid for income taxes $ 455,111 $ 252,209
========== =========
Supplemental disclosures of noncash
activities:
Mortgage loans originated to finance
sale of foreclosed real estate $ 17,500
========
See accompanying notes to consolidated financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Harrodsburg First Financial Bancorp (the "Company") was formed at the
direction of First Federal Savings Bank of Harrodsburg (the "Bank") to
become the holding company of the Bank upon the conversion of the Bank
from mutual to stock form (the "Conversion"). Since the Conversion, the
Company's primary assets have been the outstanding capital stock of the
Bank, 50% of the net proceeds of the Conversion, and a note receivable
from the Company's Employee Stock Ownership Plan ("ESOP"), and its sole
business is that of the Bank. Accordingly, the consolidated financial
statements and discussions herein include both the Company and the Bank.
The Company was incorporated at the direction of the Board of Directors
of the Bank in June 1995. On September 29, 1995, the Bank converted from
mutual to stock form as a wholly owned subsidiary of the Company. In
conjunction with the Conversion, the Company issued 2,182,125 shares of
its common stock to the public.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) necessary for
fair presentation have been included. The results of operations and other
data for the three and nine month periods ended June 30, 1996 are not
necessarily indicative of results that may be expected for the entire
fiscal year ending September 30, 1996.
2. Earnings Per Share
Earnings per share for the three and nine month periods ended June 30,
1996 amounted to $0.19 per share and $0.53 per share, respectively, based
on weighted average common shares outstanding. The weighted average
number of common shares outstanding for the three and nine month periods
ended June 30, 1996 was 2,003,280 and 2,006,145 shares, respectively.
Earnings per share is not presented for the three and nine month periods
ended June 30, 1995 because the conversion to a stock savings bank with
the simultaneous formation of a unitary savings and loan holding company
did not occur until September 29, 1995.
3. Impaired Loans
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan." In October 1994, this statement was amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." SFAS No. 114 as amended generally requires
that impaired loans be measured based on the present value of the loan's
expected future cash flows discounted at the loan's effective interest
rate. The measurement of impairment for loans that are collateral
dependent may be based on the fair value of the collateral. If the
present value or the fair value of the collateral is less than the
recorded investment in the loan an impairment will
6
be recognized. This statement as amended allows a creditor to use
existing methods for recognizing interest income on an impaired loan.
Both of these statements are effective for financial statements for
fiscal years beginning after December 15, 1994. The Company adopted these
standards on October 1, 1995.
The Company has defined its population of impaired loans as consisting of
all loans in a non-accrual status. Non-accrual loans, which includes all
impaired loans, are loans which management believes may have defined
weaknesses whereby it is probable that all amounts due under the
contractual terms of the agreement will not be collected. Generally,
these are loans which are past due as to maturity or payment of principal
or interest for a period of more than 90 days unless such loans are
well-secured and in the process of collection. Payments received on these
loans are either applied to the outstanding principal balance or recorded
as interest income, or both, depending on assessment of the
collectibility of the loan. Loans may be returned to accrual status when
all principal and interest amounts contractually due (including
arrearages) are reasonably assured of repayment within an acceptable
period of time, combined with sustained repayment performance by the
borrower.
As of June 30, 1996 and for the nine month period then ended, the Company
did not have any impaired loans. The following summarizes the activity in
the allowance for loan losses for the nine months ended June 30, 1996.
Allowances for General
Losses on Allowance for
Impaired Loans Loan Losses Total
Balance, September 30, 1995 $ 0 $ 297,292 $ 297,292
Additions 0 0 0
Charge-offs 0 0 0
Recoveries 0 0 0
-------- -------- --------
Balance, June 30, 1996 $ 0 $ 297,292 $ 297,292
======== ======== ========
4. Dividends
A cash dividend of $0.20 per share was paid on April 15, 1996 to
stockholders of record as of April 8, 1996. The total dividends paid by the
Company for the nine months ended June 30, 1996 amounted to $401,511.
5. Treasury stock
Pursuant to the stock repurchase plan approved by the Board of Directors of
the Company on March 18, 1996, the Company repurchased a total of 23,100
shares at a total price of $353,763 during the nine months ended June 30,
1996.
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended June 30, 1996 and 1995
Net Income
Net income increased by $170,000 or 82.0% for the three months ended June 30,
1996 as compared to the same period in 1995. The net increase of $170,000 was
due to an increase of $268,000 in net interest income, an increase of $5,000 in
non-interest income, a decrease of $22,000 in the provision for loan losses,
offset by a $31,000 increase in non-interest expense and a $94,000 increase in
income tax expense.
Interest Income
Interest income was $1.9 million, or 7.09% of average interest-earning assets,
for the quarter ended June 30, 1996 as compared to $1.6 million, or 7.27% of
average interest-earning assets, for the quarter ended June 30, 1995. Interest
income increased by $269,000 or 16.3% from 1995 to 1996. The increase in
interest income was due primarily to a $17.4 million increase in the average
balance of interest-earning assets during the quarter ended June 30, 1996
compared to the quarter ended June 30, 1995. The increase in interest-earning
assets during the quarter ended June 30, 1996 compared to the same period in
1995 was primarily due to the net proceeds received in the stock conversion,
which was effective September 29, 1995.
Interest Expense
Interest expense was $973,000, or 4.55% of average interest-bearing deposits,
for the quarter ended June 30, 1996 as compared to $972,000, or 4.81% of average
interest-bearing deposits, for the corresponding period in 1995. Interest
expense remained relatively constant as the decrease of 26 basis points in the
average rate paid on deposits during the quarter ended June 30, 1996 compared to
the same period ended June 30, 1995 was offset by an increase of $4.7 million in
the balance of average interest-bearing liabilities in 1996 compared to 1995.
Provision for Loan Losses
There was no provision for loan losses during the quarter ended June 30, 1996;
while in the quarter ended June 30, 1995, the provision for loan losses amounted
to $22,000. Management considers many factors in determining the necessary level
of the allowance for loan losses, including an analysis of specific loans in the
portfolio, estimated value of the underlying collateral, assessment of general
trends in the real estate market, delinquency trends, prospective economic and
regulatory conditions, inherent loss in the loan portfolio, and the relationship
of the allowance for loan losses to outstanding loans. At June 30, 1996 the
allowance for loan losses represented .39% of total loans compared to .38% at
June 30, 1995.
There can be no assurance that management will not decide to increase the
allowance for loan losses or that regulators, when reviewing the Bank's loan
portfolios in the future, will not request the Bank to increase such allowance,
either of which could adversely affect bank earnings. Further, there can be no
assurance that the Bank's actual loan losses will not exceed its allowance for
loan losses.
8
Non-Interest Income
Non-interest income amounted to $25,000 and $20,000 for the quarter ended June
30, 1996 and 1995, respectively. The largest item in non-interest income is
service fees on loan and deposit accounts, which amounted to $20,000 and $14,000
for the quarter ended June 30, 1996 and 1995, respectively. The increase in
non-interest income of $5,000 was primarily due to the increase in income from
late fees on delinquent loans plus an increase in service fees on deposit
transaction accounts.
Non-Interest Expense
Non-interest expense increased $31,000 or 8.7% to $392,000 for the quarter ended
June 30, 1996 compared to $361,000 for the comparable period in 1995.
Non-interest expense was 1.4% of average assets for the quarter ended June 30,
1996 and 1.6% for the quarter ended June 30, 1995. The increase of $31,000 was
due primarily to an increase in compensation and benefits of $5,000 and an
increase of $21,000 in other operating expenses. The increase of $5,000 in
compensation and benefits was due to an expense of $27,000 related to the
employee stock ownership plan during 1996 partially offset by retirement plan
expense and employee bonuses paid in 1995, but not in 1996. The increase of
$21,000 in other operating expenses is due primarily to approximately $15,000 in
additional expense related to being a public company.
Income Taxes
The provision for income tax expense amounted to $200,000 and $106,000 for the
quarters ended June 30, 1996 and 1995, respectively, which as a percentage of
income before income tax expense amounted to 34.7% for 1996 and 34.0% for 1995.
Results of Operations for the Nine Months Ended June 30, 1996 and 1995
Net Income
Net income increased by $387,000 or 56.9% for the nine month period ended June
30, 1996 as compared to the same period in 1995. The net increase of $387,000
was due to an increase of $695,000 in net interest income, an increase of
approximately $14,000 in non-interest income, a decrease of $77,000 in the
provision for loan losses, offset by approximately a $182,000 increase in
non-interest expense and a $217,000 increase in income tax expense for the nine
month period ended June 30, 1996 compared to the same period in 1995.
Interest Income
Interest income was $5.8 million, or 7.18% of average interest-earning assets,
for the nine month period ended June 30, 1996 as compared to $4.9 million, or
7.14% of average interest-earning assets, for the nine month period ended June
30, 1995. Interest income increased by $893,000 or 18.3% from 1995 to 1996. The
increase in interest income was due primarily to an increase of $16.1 million in
the average balance of interest-earning assets during the nine month period
ended June 30, 1996 compared to the nine month period ended June 30, 1995. The
increase in interest-earning assets during the nine-month period ended June 30,
1996 compared to the same period in 1995 was primarily due to the net proceeds
received in the stock conversion, which was effective September 29, 1995.
9
Interest Expense
Interest expense was $2.9 million, or 4.47% of average interest-bearing
deposits, for the nine month period ended June 30, 1996 as compared to $2.7
million, or 4.60% of average interest-bearing deposits, for the corresponding
period in 1995. Interest expense increased by $196,000 or 7.2% from 1995 to
1996. The increase in interest expense was due primarily to a 13 basis point
increase in the average rate paid on the deposits plus a $3.5 million increase
in the average balance of interest-bearing deposits during the period ended June
30, 1996 compared to the corresponding period in 1995.
Provision for Loan Losses
There was no provision for loan losses during the nine month period ended June
30, 1996; while in the nine month period ended June 30, 1995, the provision for
loan losses amounted to $77,000. Management considers many factors in
determining the necessary level of the allowance for loan losses, including an
analysis of specific loans in the portfolio, estimated value of the underlying
collateral, assessment of general trends in the real estate market, delinquency
trends, prospective economic and regulatory conditions, inherent loss in the
loan portfolio, and the relationship of the allowance for loan losses to
outstanding loans.
Non-Interest Income
Non-interest income amounted to $73,000 and $59,000 for the nine month period
ended June 30, 1996 and 1995, respectively. The largest item in non-interest
income is service fees on loan and deposit accounts, which amounted to $56,000
and $44,000 for the nine month period ended June 30, 1996 and 1995,
respectively. The increase in non-interest income of $14,000 was primarily due
to the increase in income from late fees on delinquent loans plus an increase in
deposit transaction service fees.
Non-Interest Expense
Non-interest expense increased $182,000 or 16.9% to $1,264,000 for the nine
month period ended June 30, 1996 compared to $1,082,000 for the comparable
period in 1995. Non-interest expense was 1.6% of average assets for both
periods. The increase of $182,000 was due primarily to an increase in
compensation and benefits of $53,000, an increase in federal and other insurance
premiums of $22,000 and an increase in other operating expenses of $107,000. The
increase of $53,000 in compensation and benefits was due primarily to an expense
of $121,000 related to the employee stock ownership plan during 1996 partially
offset by retirement plan expense and employee bonus expense incurred in 1995,
but not in 1996. The increase of $22,000 in federal and other insurance premiums
is due to added premium charged by the Federal Deposit Insurance Corporation on
the increase in customer deposits. The increase of $107,000 in other operating
expenses is due primarily to approximately $85,000 in additional expense related
to being a public company, which includes increases in legal, accounting,
printing and postage, and tax and regulatory filing fees.
Income Taxes
The provision for income tax expense amounted to approximately $568,000 and
$351,000 for the nine month period ended June 30, 1996 and 1995, respectively,
which as a percentage of income before income tax expense amounted to a 34.7%
for 1996 and 34.0% for 1995.
10
Non-Performing Assets
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated.
June 30, 1996 September 30, 1995
------------- ------------------
(amounts in thousands)
Loans accounted for on a non-accrual
basis:(1)
Real Estate:
Residential................... $ $
------- -------
Total.....................
------- -------
Accruing loans which are contractually past due 90 days or more:
Real Estate:
Residential..................... 490 472
Other .......................... 62 110
Commercial......................
Consumer......................... 84 85
------- -------
Total..................... 636 667
======= =======
Total of non-accrual and 90 day past
due loans................. $ 636 $ 667
======= =======
Percentage of net loans............. .84% .88%
======= =======
Other non-performing assets (2)..... $ $
======= =======
(1) Non-accrual status denotes any loan past due 90 days and whose loan balance,
plus accrued interest exceeds 90% of the estimated loan collateral value.
Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, or both,
depending on assessment of the collectibility of the loan.
(2) Other non-performing assets represent property acquired by the Bank through
foreclosure. This property is carried at the lower of its fair market value
or the principal balance of the related loan, whichever is lower.
At June 30, 1996, the Bank did not have any loans in non-accrual status.
Accordingly, all income earned for the nine months ended June 30, 1996 on the
loans in the table above has been included in income.
At June 30, 1996, there were no loans identified by management, which were not
reflected in the preceding table, but as to which known information about
possible credit problems of borrowers caused management to have serious doubts
as to the ability of the borrowers to comply with present loan repayment terms,
except as described in the following paragraph:
As of June 30, 1996, the Bank has a commercial loan in the amount of $770,000
secured by certain real estate in a shopping center located in Nicholasville,
Kentucky, which is delinquent two monthly payments according to the terms of
the loan. The Bank is currently receiving monthly payments and management is
of the opinion that the market value of the property is adequate to protect
it from any loss at this time.
11
Financial Condition
The Company's consolidated assets increased approximately $2.4 million or 2.2%
to $109.6 million at June 30, 1996 compared to $107.2 million at September 30,
1995. The increase primarily reflected an increase of $7.6 million in investment
securities offset by a $5.4 million decrease in cash, interest-bearing deposits
and certificates of deposits.
The Company's investment portfolio increased approximately $7.6 million.
Securities classified as available-for-sale and recorded at market value per
SFAS No. 115 increased $315,000 due solely to the increase in market value of
such securities. Held-to-maturity securities increased $7.2 million due to the
purchase of FHLB, FNMA, and local municipal bonds, based on management's
decision to seek higher yields on funds available for investment.
Under SFAS No. 115, unrealized gains or losses on available-for-sale securities
are recorded net of deferred income tax as a separate component of stockholders'
equity. At June 30, 1996, the Company included net unrealized gains of
approximately $1.0 million in stockholders' equity. At September 30, 1995, the
Company included net unrealized gains of approximately $829,000 in stockholders'
equity. Per SFAS No. 115, such gains or losses will not be reflected as a charge
or credit to earnings until the underlying gains or loss, if any, is actually
realized at the time of sale.
Loans receivable increased by $50,000 from $75.4 million at September 30, 1995
to $75.5 million at June 30, 1996. This slight increase reflects the strong
competition in the local market area and the relative stability of interest
rates.
Deposits increased approximately $1.9 million or 2.6% from $75.9 million at
September 30, 1995 to $77.8 million at June 30, 1996. This increase reflects the
Company's competively priced product line within the local market area.
Stockholders' equity increased by $643,000 to $30.8 million as of June 30, 1996.
The increase is due to the increase in the net unrealized appreciation on
available-for-sale securities of $208,000, net income of $1.1 million, plus an
increase of $121,000 for the allocation of 8,730 shares from the ESOP plan which
was established in connection with the Bank's stock conversion at September 29,
1995, offset by $353,000 used to repurchase 23,100 shares of the Company's
common stock and $401,000 paid in dividends.
12
The following summarizes the Bank's capital requirements and position at June
30, 1996 and September 30, 1995.
June 30 September 30
1996 1995
---------------------- ----------------------
(Dollars in Thousands)
Amount Percent Amount Percent
Tangible capital........... $ 21,695 20.00% $ 20,531 18.98%
Tangible capital requirement 1,628 1.50% 2,134 1.50%
-------- -------- -------- -------
Excess ................. $ 20,067 18.50% $ 18,397 17.48%
======== ======== ======== =======
Core capital............... $ 21,695 20.00% $ 20,531 18.98%
Core capital requirement... 3,256 3.00% 4,268 3.00%
-------- -------- -------- -------
Excess ................. $ 18,439 17.00% $ 16,263 15.98%
======== ======== ======== =======
Tangible capital .......... $ 21,695 40.81% $ 20,531 30.03%
General valuation allowance 290 .55% 290 .42%
-------- -------- -------- -------
Total capital (core and
supplemental) 21,985 41.36% 20,821 30.45%
Risk-based capital requirement 4,253 8.00% 5,469 8.00%
-------- -------- -------- -------
Excess ................. $ 17,732 33.36% $ 15,352 22.45%
======== ======== ======== =======
Liquidity
The liquidity of the Company depends primarily on the dividends paid to it as
the sole shareholder of the Bank. At June 30, 1996, the Bank could pay common
stock dividends of approximately $9.9 million.
The Bank's primary sources of funds are deposits and proceeds from principal and
interest payments of loans. Additional sources of liquidity are advances from
the FHLB of Cincinnati and other borrowings. At June 30, 1996, the Bank had no
outstanding borrowings. The Bank has utilized and may in the future, utilize
FHLB of Cincinnati borrowings during periods when management of the Bank
believes that such borrowings provide a lower cost source of funds than deposit
accounts and the Bank desires liquidity in order to help expand its lending
operations.
The Company's operating activities produced positive cash flows for the nine
month periods ended June 30, 1996 and 1995.
The Bank's most liquid assets are cash and cash-equivalents, which include
investments in highly liquid, short-term investments. At June 30, 1996 and 1995,
cash and cash equivalents totaled $19.1 million and $8.0 million, respectively.
13
At June 30, 1996, the Bank had $40.0 million in certificates of deposits due
within one year and $18.1 million due between one and three years. Management
believes, based on past experience, that the Bank will retain much of the
deposits or replace them with new deposits. At June 30, 1996, the Bank had $1.8
million in outstanding commitments to originate mortgages. The Bank intends to
fund these commitments with short-term investments and proceeds from loan
repayments.
OTS regulations require that the Bank maintain specified levels of liquidity.
Liquidity is measured as a ratio of cash and certain investments to withdrawable
savings. The minimum level of liquidity required by regulation is presently
5.0%. During the first nine months of fiscal year 1996, the Bank satisfied all
regulatory liquidity requirements, and management believes that the liquidity
levels maintained are adequate to meet potential deposit outflows, loan demand,
and normal operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
SAIF/BIF Premium Disparity -- Possible Assessment
As a result of a recent reduction by the FDIC of deposit insurance rates
applicable to commercial banks, savings institutions could be at a significant
disadvantage in competing with banks. Generally, commercial banks are insured by
and pay their premiums to the Bank Insurance Fund ("BIF") and savings
associations, such as the Bank, are insured by and pay their premiums to the
Savings Association Insurance Fund ("SAIF"). Both the BIF and the SAIF are
administered by the FDIC. Both BIF and SAIF members had been paying deposit
insurance premiums at the same rates which ranged from 0.23% for the most highly
rated institutions to 0.31% for the lowest rated institutions. On August 8,
1995, the FDIC approved a decrease in the minimum insurance premium charged to
BIF-insured institutions from 0.23% to 0.04% while leaving the level of premiums
intact for SAIF-insured institutions. This new rate structure is effective for
the quarter ended September 30, 1995. Furthermore, in November 1995, the FDIC
further lowered BIF premiums whereby a significant portion of BIF institutions
now pay only the statutory minimum of $2,000 annually. As a result of this
premium disparity, BIF-insured institutions could have a significant competitive
advantage over SAIF-insured institutions in attracting and retaining deposits.
This premium disparity could have a material effect on the results of operation
and financial condition of the Bank in future periods.
14
A number of proposals have been considered to recapitalize the SAIF in order to
eliminate this premium disparity. One proposal which had been approved by the
United States Senate and House of Representatives, but vetoed by the President
for various reasons, required a one-time assessment of .85% of deposits to be
imposed on all SAIF-insured institutions. The assessment would result, on a pro
forma basis as of June 30, 1996, in a one-time charge to the Bank of up to
approximately $694,000 ($458,000 net of income tax benefit assuming such charge
would be tax deductible). If the Bank is required to pay the proposed special
assessment, future deposit insurance premiums are expected to be reduced from
0.23% to approximately 0.06%. Based upon the Bank's deposits as of June 30,
1996, the Bank's deposit insurance expense would decrease by approximately
$94,000 per year after taxes. Management is unable to predict whether this
proposal or any similar proposal will be enacted or whether ongoing SAIF
premiums will be reduced to a level comparable to that of BIF premiums.
A number of other related proposals are also under consideration in Congress,
including those relating to merger of the SAIF and BIF, elimination of the
thrift charter and the federal tax consequences of thrifts' conversion to
national banks. The Company is unable to accurately predict whether these
proposals will be adopted in their current form or the impact of such proposals
on the Company's consolidated financial statements.
Bad Debt Recapture
Legislation being considered by Congress would repeal the bad debt deduction
under the percentage of taxable income method of the Internal Revenue Code.
Savings associations, like the Bank, which have previously used the percentage
of taxable income method in computing its bad debt deduction for tax purposes
would be required to recapture into taxable income post-1987 reserves over a
six-year period beginning with the 1996 taxable year. The start of such
recapture may be delayed until the 1998 taxable year if the dollar amount of the
institution's residential loan originations in each year is not less than the
average dollar amount of residential loans originated in each of the six most
recent years disregarding the years with the highest and lowest originations
during such period. For purposes of this test, residential loan originations
would not include refinancing and home equity loans. The Company cannot predict
at this time if such legislation will be enacted, or if enacted, the amount of
bad debt reserves the Company will be required to recapture.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K None
(a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
(b) Form 8-K, Item 5 filed on May 10, 1996 relating to the
Company's announcement of the adoption of a stock repurchase
program.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Harrodsburg First Financial Bancorp, Inc.
Date: August 1, 1996 /s/ Jack Hood
Jack Hood
President
(Duly Authorized Officer)
Date: August 1, 1996 /s/ Teresa W. Noel
Teresa W. Noel
Treasurer
(Principal Financial and Accounting
Officer)
17